United States District Court, E.D. Wisconsin
DECISION AND ORDER
ADELMAN United States District Judge
5, 2009, a fire at a large pork-processing facility owned by
Patrick Cudahy, Inc. (“PCI”), caused substantial
damage to the company's property. In the present action,
PCI and its parent company, Smithfield Foods, Inc., along
with six of Smithfield's property insurers, bring claims
against the United States under the Federal Tort Claims Act.
They allege that the United States was negligent in allowing
a military flare to be stolen from one of its bases. This
flare ignited the fire at the PCI plant. The parties have
settled the liability component of this case, leaving for the
court the question of the amount of damages to award to the
plaintiffs. Between November 16, 2015 and November 23, 2015,
Judge Randa of this court presided over a bench trial
concerning the amount of damages. However, Judge Randa passed
away before issuing his findings of fact and conclusions of
law. The case was then reassigned to me.
effort to resolve this case without recalling any witnesses,
see Fed. R. Civ. P. 63, the parties proposed that I
decide four issues that bear on the computation of the
plaintiffs' damages. The parties believe that after these
issues are resolved, they will be able to reach a settlement
concerning the amount of damages. The parties have since
filed briefs on these four issues, and I address their
arguments below. Judge Randa previously determined that
California substantive law applies to this case, see
ECF Nos. 192 & 195, and therefore I apply that
state's law in resolving these four issues.
turning to these issues, I note that my addressing them
should not be viewed as a license to the parties to present
new evidence that wasn't presented at the trial in
November 2015. That is, if I had answered these questions as
part of a ruling on motions before trial, the parties would
have shaped their trial presentations to match my answers.
However, what I am doing now is essentially rendering partial
findings of fact and conclusions of law based on the evidence
actually presented at trial. See Fed. R. Civ. P. 52.
It is now too late for the parties to present testimony that
might better match my answers to their questions. Thus, the
November trial record will control unless I later determine
that it is necessary to recall witnesses under Federal Rule
of Civil Procedure 63.
Measure of Loss for “Customized
plaintiffs frame the first question as follows: “Is the
measure for the loss of PCI's customized machinery its
actual cash value or its replacement cost?” Br. at 1,
ECF No. 219. The plaintiffs do not ask me to determine what
property qualifies as “customized machinery, ”
and they do not ask me to determine the actual cash value or
replacement cost of any specific item of personal property.
Rather, the plaintiffs ask me to decide the proper
methodology for determining the value of any property later
deemed to be customized machinery: is it actual cash value or
replacement cost? As the parties use the term, “actual
cash value” means replacement cost less depreciation.
See Tr. at 842, 850. Thus, it appears that the dispute
is over whether depreciation should be deducted from the
replacement cost of an item of custom property.
California law, the measure of damages for the loss or
destruction of personal property is the value of the property
at the time of such loss or destruction. Hand Elecs.,
Inc. v. Snowline Joint Unified Sch. Dist., 21
Cal.App.4th 862, 870 (1994). Thus, my goal in this case is to
award the plaintiffs the value that PCI's food-processing
equipment had just before the fire destroyed it. In general,
this will involve determining the equipment's fair market
value at that time. See Cal. Civ. Jury Instr. 3903K.
“Fair market value” is the highest price that a
willing buyer would have paid to a willing seller assuming
that there is no pressure on either to buy or sell and the
buyer is fully informed of the condition and quality of the
property. Id. However, courts recognize that there
are situations in which fair market value is not the proper
measure of the loss. For example, in Kimes v.
Grosser, the court held that the measure of damages for
a pet cat intentionally injured by the defendant was the
reasonable cost of the veterinary care the owner reasonably
incurred after the injury, even though the fair market value
of the cat was negligible. 195 Cal.App.4th 1556, 1561-62
(2011). In Kimes, the court recognized that where
property has no fair market value, the property's value
“must be ascertained in some other rational way, and
from such elements as are attainable.” Id. at
present case, the parties agree that, to the extent it is
possible to identify a fair market value for PCI's
machinery and equipment, then fair market value should be
used to determine damages. At trial, the parties'
witnesses calculated fair market value by finding used
equipment on the secondary market that was equivalent to the
PCI equipment lost in the fire. See Tr. at 387, 849.
However, equivalents to much of PCI's equipment could not
be found on the secondary market, which made it impossible to
determine the fair market value of that equipment. According
to the defendant, some equipment was simply not available on
the secondary market at the time the parties were looking.
But the equipment at issue for present purposes is equipment
that would never be available on the secondary market because
PCI had that equipment custom-made.
plaintiffs contend that California has adopted a rule stating
that damages for the destruction of custom equipment or
property is replacement cost. In support of this contention,
the plaintiffs cite two cases. The first case is Leslie
Salt Co. v. St. Paul Mercury Insurance Co., 637 F.2d 657
(9th Cir. 1981). In that case, the plaintiff manufactured
salt by removing it from seawater. An accident damaged a
custom-made machine that the defendant used for stacking
salt. The defendant argued that the measure of damages for
the stacker should be its fair market value. However, the
court found that there was no market for the custom-made
stacker, and that therefore the rule requiring use of fair
market value to measure damages was inapplicable.
Id. at 660. The court then wrote that “[t]he
law has long recognized that the actual cash value of
property with no market may be measured with reference to the
cost of replacement.” Id. The court determined
that, for this reason, the trial court did not err in giving
the following instruction to the jury:
In determining the actual cash value of the property damaged,
it shall be as of the time of the commencement of the loss on
August 15, 1973, and shall be ascertained according to such
actual cash value with proper deduction for depreciation,
however caused, and salvage value and shall in no event
exceed what it would then cost [the plaintiff] to repair or
replace the same with material of like kind and quality.
plaintiff contends that the Leslie Salt court held
that “where custom property with no market is
concerned, replacement cost is the measure of
recovery.” ECF No. 219 at p. 12 of 14. However, this is
not an accurate statement of the court's holding. The
court held that the actual cash value of property with no
market may be measured with reference to the cost of
replacement, not that the value was the cost of
replacement. And the jury instruction that the court approved
instructed the jury to make a “proper deduction for
depreciation, ” and also that replacement value was
merely a cap on the amount of damages. Essentially, then,
Leslie Salt approves the method that the United
States used for determining the value of the plaintiff's
custom property: the court must start with replacement cost
and then take a proper deduction for depreciation. In this
way, the court measures value “with reference to”
replacement cost, but it does not simply identify the
replacement cost and award that cost as damages.
plaintiffs' other case is PCB Productions, Inc. v.
MJC America, Ltd., No. B242443, 2014 WL 2514624 (June 4,
2014), which is an unpublished decision of the California
Court of Appeal. In that case, a defective product caused a
fire in the plaintiff's recording studio that, among
other things, destroyed the plaintiff's library of sound
samples that it used to create audio for movies, television,
video games, and other media. The plaintiff created this
library over a 25-year period by traveling around the world
and recording various sounds. The plaintiff argued that the
sound library was unique and had no market, and that
therefore the proper measure of damages was the cost to
reproduce the library, as measured by the time and travel
costs associated with recording the sounds. Id. at
*5. The defendant argued that because commercial sound
libraries were available for purchase, the plaintiff's
sound library in fact had a fair market value. Id.
at *7. Therefore, the defendant argued, the proper measure of
damages was fair market value rather than replacement cost.
Id. The court found that the jury could reasonably
find that the plaintiff's sound library had peculiar
value to the plaintiff, and that the market value of a
commercial sound library did not represent the value of the
plaintiff's custom library. Id. at *13-14. The
court then found that if the plaintiff's unique sound
library had no market value, a “just and
rational” way to measure the plaintiff's damages
would be replacement cost. Id. at *14.
PCB case does not stand for the proposition that the
measure of damages for all custom property is replacement
value. Rather, the point being contested in that case was
whether the plaintiff's library was comparable to a
commercial sound library that could be purchased “off
the shelf.” If it was, then the fair market value of
the commercial library would have been the measure of the
plaintiff's damages. The court's opinion in the case
does not suggest that the defendant disputed that replacement
cost would be the proper measure of damages if the court
determined that the plaintiff's library was not
comparable to a commercial library. Indeed, if the library
were not comparable to a commercial library, it is hard to
see any way of measuring damages other than by the cost of
traveling around the world and re-recording the sounds.
Moreover, the defendant would not have had any grounds to
argue for a depreciation deduction, as sounds do not wear out
or become obsolete. Thus, the PCB case is simply one
instance in which it made sense to measure damages for custom
property by its replacement cost. It does not stand for some
broader rule that the measure of damages for all custom
property is replacement cost.
present case, PCI's custom property is not comparable to
the sound library in the PCB case. Unlike sounds,
equipment used in a food-processing facility will eventually
wear out or become obsolete, and thus a deduction for
depreciation will be appropriate, as it was in the Leslie
Salt case. The plaintiffs contend that PCI's custom
property did not deteriorate because PCI took extremely good
care of it. However, while PCI might have maintained its
property in as pristine a condition as possible, that does
not mean the equipment's value did not depreciate over
time. No matter how well PCI maintained this equipment, I do
not believe that a third party who could have used it would
have paid as much for PCI's equipment, which had been
heavily used in a pork-processing facility over many years,
as it would have for the same equipment new and unused. In
any event, even if I believed that PCI's equipment never
physically deteriorated (which I do not), the property would
lose value over time as it became obsolete. PCI's own
witness testified that it would replace equipment as new,
more efficient equipment became available. See Tr.
at 183 (PCI would replace equipment “if we can find an
improvement in speed, reduction of people, something that
would give us an appropriate return on investment”).
Thus, to answer the plaintiff's first question, I find
that the proper measure of damages for PCI's custom
property is replacement cost less depreciation, i.e., the
actual-cash-value methodology employed by the defendant's
expert, Mark Ewing.
Mechanical, Electrical, and Plumbing Utilities
second question relates to the value of certain mechanical,
electrical, and plumbing utilities, or “MEP.” The
parties agree that MEP that would be found in any commercial
facility, such heating and air conditioning, light fixtures,
and plumbing for restrooms, should be valued as part of the
real estate. However, they dispute whether MEP that serviced
PCI's specialized food-processing equipment should also
be considered part of the real estate. The plaintiffs
describe this kind of MEP as “utility lines, ammonia
piping, grease collection lines, etc. that are installed for
the sole purpose of servicing the food processing equipment
at the facility.” Br. at 2, ECF No. 220. The plaintiffs
do not explain in detail what this kind of MEP consists of.
However, from their use of the terms “piping” and
“lines, ” ...